The size of the JPMorgan settlement, which the government called the
largest in U.S. history, led many banks to realize that the cost of
resolving some of their own legal problems was likely to be higher
than they had initially believed, the sources said.
Justice Department officials have said in public statements they
want to use the JPMorgan settlement as a template for deals with
Bank of America, Citigroup, Goldman Sachs and Morgan Stanley all
added hundreds of millions of dollars to funds they have set aside
to pay for the cost of litigation, including legal fees, fines and
settlements. All four banks are facing mortgage-related
investigations by federal prosecutors located in different parts of
The increase in such funds impacted the fourth quarter results of
the banks published this week, surprising many analysts.
The total amount of the four banks' increases in litigation reserves
could not be determined because the banks reported them in different
formats. A U.S. Securities and Exchange Commission rule says
companies must only reserve funds for losses that are "probable and
estimable," but does not require companies to disclose how the
reserves match their specific expectations.
Spokesmen at all four banks declined to comment.
The additions to legal reserves show how cases related to practices
that sometimes date back to before the financial crisis are likely
to continue to cause pain to the U.S. banking industry. U.S. and
European regulators fined banks record amounts last year, imposing
penalties and settlements of more than $43 billion as authorities
work more closely across borders to clean up the financial sector.
The U.S. government's Residential Mortgage Backed Securities Working
Group, a network of federal and state prosecutors and investigators
set up in 2012, has been poring over records and testimony relating
to residential mortgage-backed securities (RMBS). Many of these
assets were stuffed with home loans that were badly underwritten and
issued in the years leading up to the crisis.
[to top of second column]
"Where the industry thought they were at the tail end of it there's
reason to wonder whether there's a whole new round of broader suits
that may be brought," said Joshua Rosner, a managing partner at
Graham Fisher & Co, an independent research consultancy.
Goldman Sachs said its net provisions for legal expenses in 2013
amounted to $962 million, up from the $448 million it reserved
throughout 2012. Bank of America said it had added $2.3 billion to
its reserves during the fourth quarter, up from $1.1 billion in the
third quarter. Citi added $809 million in the fourth quarter after
adding $677 million in the third quarter.
Morgan Stanley added $1.2 billion in the fourth quarter to its
litigation reserves, and specifically cited investigations "related
to residential mortgage-backed securities and the credit crisis" as
the motivation for doing so.
Citigroup Chief Financial Officer John Gerspach said in a conference
call with analysts to discuss quarterly earnings that he expected
the bank's legal expenses relating to its "legacy assets" would
"remain elevated." Legacy assets include mortgage-backed securities
that the bank packaged and sold before the crisis.
"It's driven by the higher level of litigation-related activity
throughout the industry," Gerspach said on Thursday, adding that
Citi's consideration of the landscape had included "things that
you've seen hit the press as far as the industry."
(Additional reporting by Peter Rudegeair
in New York and Aruna Viswanatha in Washington; editing by Andrew
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